PROPOSED REGULATION
SCI: FINALLY THE RIGHT BALANCE?

In early March, the US
Securities and Exchange Commission (SEC) proposed new Regulation Systems
Compliance and Integrity (Regulation SCI) to require entities important to the
functioning of the US
securities markets “to carefully design, develop, test, maintain, and surveil
systems integral to their operations”. At a minimum, Regulation SCI would apply
to certain self-regulatory organisations, (including registered clearing
agencies), alternative trading systems, plan processors and exempt clearing
agencies subject to the SEC’s Automation Review Policy program (ARP).

Regulation
SCI would supersede and replace ARP, which is a voluntary information
technology review program created in response to the October 1987 market break
and set forth in two policy statements issued in 1989 (ARP I) and 1991 (ARP
II). In a nutshell, the SEC published ARP because it was concerned about the
potential for systems failures to negatively impact public investors,
broker-dealer risk exposure and market efficiency. However, ARP’s ability to
enforce compliance by its voluntary participants has always been limited since
it was established pursuant to SEC policy statements, rather than formal
rulemaking. Moreover, after more than two decades, it is painfully clear that
ARP has failed to keep up with faster and more technologically advanced
markets.

SEC
Commissioner Luis A. Aguilar noted how recent events have demonstrated how
quickly technology systems can become a destructive force with devastating
consequences. In particular, Commissioner Aguilar summarised the following
system-related issues:

The
Flash Crash of 6 May 2010. In just a few moments, nearly $1 trillion in market value
evaporated before making a partial recovery.